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H.S. Kamlani, Official Liquidator Vs. Mazgaon Dock Ltd. - Court Judgment

LegalCrystal Citation
SubjectCompany
CourtMumbai High Court
Decided On
Case NumberO.S. Appeal Nos. 57, 59, 61, 62, 63, 64, 65, 66, 67, 68, 69, 70 and 71 of 1977
Judge
Reported in(1982)84BOMLR100
AppellantH.S. Kamlani, Official Liquidator
RespondentMazgaon Dock Ltd.
Excerpt:
.....rules, 1959, rule 291--scope and object of section 458-a--book debts of company hypothecated to bank--company going into liquidation--understanding by bank with official liquidator that he should initiate proceedings for recovery of book debts against debtors at costs and commission of bank--recovery proceedings whether on behalf of company--extended period of limitation under section 458-a whether available.;where the book debts of a company are hypothecated to a bank as security and after the winding up order against the company an understanding is reached with the bank under which the official liquidator is to initiate proceedings for the recovery of the book debts as such official liquidator and the bank is to bear the costs of the litigation and to pay over and above the fees..........liquidator to initiate the proceedings and question of his having initiated proceedings on bank's behalf could never have arisen. the liquidator could not have been appointed by the bank as its agent for such recoveries. the learned judge, amongst others inferred the agency from the circumstances of the bank having agreed to pay the commission. section 451 read with rule 291 authorises the liquidator to recover 'fees' for his work of realising the company's property as such liquidator. thus, describing such fees as commission cannot make the liquidator creditor's agent when the act, the rule does not so contemplate and when the dues happen to be of the company and not of the bank. that the receiver appointed in the suit of the bank against the liquidator, could have instituted.....
Judgment:

V.S. Deshpande, C.J.

1. This group of 13 appeals raise a common question of law as to the scope of Section 458-A of the Companies Act (hereinafter referred to as the 'Act'), and can, therefore, be disposed of by this common judgment.

2. The Official Liquidator is the appellant in all these appeals. Respondents in all these appeals are the debtors of Alcock Ashdown Company (hereinafter referred to as the 'Company'). The Company claims this amount for the repair works of the vessel carried on in 1971 at the instance of the debtors. An order for winding up of this Company was passed on December 13, 1972 in Company Petition No. 86 of 1971 dated August 24, 1971. The appellant was appointed as Liquidator therein.

3. The State Bank of India (hereinafter referred to as the 'Bank') is one of the secured creditors of the Company, the book debts of the Company having been hypothecated amongst other therewith as security. The Bank filed a suit being Suit No. 426 of 1973 against the Official Liquidator for recovery of its debts to the tune of Rs. 1,18,88,504 on April 24, 1973 with the leave of the Court. At the instance of the Bank, a receiver was appointed on May 4, 1973 with authority, amongst others, to recover these book debts. This order was however, modified firstly on May 16, 1973 and finally with the consent of the Liquidator, on July 11, 1973, excluding these books debts from his charge, presumably to enable the Liquidator to enforce the recovery by recourse to his powers under the Act.

4. This order appears to have been preceded by negotiations between the Official Liquidator and the Bank. An understanding was reached between them under which Official Liquidator was to initiate proceedings for the recovery of the book debts as such Official Liquidator and the Bank was to bear the costs of the litigation and their Attorneys M/s. Crawford Bayley & Company were to act for the Official Liquidator in all such proceedings. Over and above the fees payable to the Official Liquidator under Rule 291(4), the Bank was to pay commission at the rate of 10 per cent of the recovery in the contested matters and as such commission for the uncontested matters varies as the Court may fix, obviously for the benefit of the unsecured creditors.

5. The Official Liquidator submitted his report to the Company Judge on April 20, 1973 setting out the terms of this understanding and solicited directions. The Learned Company Judge granted leave for the purpose and gave his necessary directions by his order dated April 27, 1973. He fixed commission in uncontested recoveries at 5 per cent.

6. The Official Liquidator thereupon took out a Judge's Summons against the respondents on or about November 7, 1975 for the recoveries of the debts. The debtors in appeal No. 63/77 owed this amount to the Company for the repairs work of the vessels carried on in the year 1971 at the debtors' instance. The claim was resisted by the respondent debtors on various grounds, one being that the claim had become time barred by the date on which Judge's Summonses were taken out, That the Company's claim had become so time barred was and is not disputed. Reliance is however, placed by the Liquidator on Section 458-A of the Act for the extended period of limitation. Section 458-A of the Act reads as follows:

'Eaxhisium of certain time in computing periods of limitation.-Notwithstanding anything in the Indian Limitation Act, 1008 (IX of 1908) or in any other law for the time being in force, in computing the period of limitation prescribed for any suit or application in the name and on behalf of a Company which is being wound up by the Court, the period from the date of commencement of the winding up of the Company to the date on which the winding up order is made (both inclusive) and a period of one year immediately following the date of the winding up order shall be excluded.

7. This section thus provides for longer periods of limitation for the suits or claims instituted 'in the name and on behalf of the Company (under liquidation).' The period from the commencement of the winding up to the date on which winding up order is made and a further period of one year thereafter, is liable to be added to the ordinary period of limitation applicable under the Limitation Act. It is not disputed that the claim would be within time on the date of Judge's Summons if limitation is computed by adding this period.

8. The short question, that arises for consideration is whether the recovery of the dues from the respondents by the Judge's Summons under the above understanding with the Bank can be said to be 'in the name and on behalf of the Company' as contemplated under Section 458-A of the Act. That the claim in the name of the liquidator in these proceedings is a claim in the name of the Company was and is not disputed by the respondents. The learned Company Judge found that the claim having been expressly made on behalf of the Bank, Section 458-A of the Act, cannot be attracted and the extended period of limitation cannot be availed of. In this view of the matter, the Judge's Summons was dismissed as being time barred. Hence, these appeals.

9. It will be convenient at the outset to find out what the rights, duties and powers of. the Liquidator are in regard to such debts claimable by any company under liquidation. Section 448 contemplates appointment of Official Liquidator when order for winding up of the Company is made under Section 447 of the Act. Section 451(1) casts obligation on him to conduct the proceedings in winding up the Company and perform such duties in reference thereto as the Court may impose. Sub-section (2) permits payment of such fees to the Official Liquidator, out of the assets of the Company, as may be prescribed. Rule 291 does prescribe such fees for certain of his acts. Section 456 requires and authorises the liquidator to take into his custody and under his control all the properties, effects and actionable claims to which the Company is or appears to be entitled. Section 457 provides for enforcement of delivery of properties to him in cases, where the property of the Company is in possession of the third person. Section 457(1)(a) authorises him to institute and defend any suit 'in the name of and on behalf of the Company.' Section 467 requires the Court, amongst others to cause assets of the Company to be collected and applied in discharge of its liabilities and also direct delivery of the property to the Liquidator. Section 529 makes the Insolvency Rules applicable to the winding up of the insolvent Companies.

10. It is not in dispute that the book debts stood hypothecated with the Bank. Such hypothecation however, cannot, make the Bank owner of the debts and by itself authorise the Bank to claim debt amounts from the Company's debtors in its own rights or institute suits or any other proceedings against such debtor for such recovery directly in its own name. No one else also can sue or initiate proceedings for such recovery on behalf of the Bank when it cannot sue on its own. The Company continued to be the owner, of the debts. The Official Liquidator alone can enforce its recovery representing the owner Company on its going into liquidation. That is why, the Bank instituted a suit No. 426 of 1973 against the Official Liquidator and not against the Company's debtors for recovery of its dues from the Company. The receiver appointed in this suit by the Court at the instance of the Bank was initially authorised to enforce the recovery of the book debt. Even such receiver could not have sued on behalf of the Company. He could have sued in his own name, claiming to be seeing for the creditor of the Company on the authority of the Court's order. Secondly, the task would have been both expensive and time consuming. That appears to have prompted the Bank to approach the Official Liquidator who was also under an obligation to collect the assets including such debts of the Company from its debtors and could, as the representative of the Company directly initiate the recovery proceedings Section 457(1)(a) of the Act. This explains why the receiver was relieved of the charge of these book debts by subsequent order dated July 11, 1973 with the consent of the Official Liquidator. By that time, the understanding between the Official Liquidator and the Bank was already reached. As seen earlier, Judge's Summonses were taken out by the Liquidator only after getting leave of the Court to that effect on July 23, 1973 virtually permitting the Liquidator to effectuate the understanding.

11. The assumption, in the impugned order, of the Official Liquidator having initiated proceeding 'on behalf of the State Bank' is thus ill founded, and totally incorrect. When the Bank could not enforce recovery of the Company's debts in its own rights notwithstanding the hypothecation, it could not authorise the Official Liquidator to initiate the proceedings and question of his having initiated proceedings on bank's behalf could never have arisen. The Liquidator could not have been appointed by the Bank as its agent for such recoveries. The learned Judge, amongst others inferred the agency from the circumstances of the bank having agreed to pay the commission. Section 451 read with Rule 291 authorises the liquidator to recover 'fees' for his work of realising the Company's property as such liquidator. Thus, describing such fees as commission cannot make the Liquidator creditor's agent when the Act, the rule does not so contemplate and when the dues happen to be of the Company and not of the Bank. That the receiver appointed in the suit of the Bank against the Liquidator, could have instituted the suits for recovery of the Company's debts under the authority of the Court hearing the said suit is not relevant to the point.

12. On the other hand, Official Liquidator is under an obligation to collect the debts of the Company. The Official Liquidator is empowered to do so under Section 457. It was all the more necessary for the liquidator to initiate recovery proceedings when mere hypothecation could not enable the Bank to sue or otherwise recover the same in its own right. It could not allow the debts to become time barred without committing breach of the obligation. Hypothecation could only prevent the Official Liquidator from impairing the security of the Bank. Subject to this limitation, the Liquidator had to act. He did act accordingly. The circumstance that the Bank furnished the required money and legal services cannot alter the legal position.

13. Section 458A is clearly intended to extend the limitation period for the benefit of the Company (in liquidation) and the Official Liquidator, appointed to carry on its winding up process by collecting the assets and distributing the same between those entitled to the same. The underlying object in extending the limitation obviously is to enable the Liquidator to take charge of the company's affairs, to examine the records, account books, study the statements, decide against whom to proceed and in what manner. He has also to find resources for initiating and conducting the proceedings. The proceedings so initiated by him whether by way of suit or Judge's Summons, for enforcement of the recoveries of debts cannot but be on behalf of the Company having regard to his source of authority of the provisions of the Companies Act, and the statutory obligation in discharge of which he has to act in this behalf. The Act does not contemplate his acting in the matter of such recoveries excepting as such Official Liquidator and excepting on behalf of the Company.

14. Mr. Andhyarujina, Mr. Chagla, Mr. Dalai and other learned Advocates appearing for the respondents-debtors could not dispute the above legal position or the authority of the Official Liquidator to enforce recoveries of the debts on behalf of the Company. They however, contend that, in point of fact, recovery in these cases have not been initiated on behalf of the Company as the same are expressly indicated to be on behalf of the State Bank of India. Strong reliance is placed on certain indisputable facts. Thus, the debts are expressly claimed by the Official Liquidator on behalf of the bank, (a) In the Judge's Summons taken out by the Liquidator as a result of the understanding with the Bank; (b) in the report dated July 20, 1973 made by the Official Liquidator to the Company Judge setting out the terms of understanding with the Bank; (c) in the direction solicited from the Company Judge for initiating proceedings for such recovery; (d) in the notice of demand served on such debtors after the Company Judge had authorised him to so enforce recovery; and (e) in the affidavit by the Liquidator in support of the Judge's summons. Secondly, costs of these proceedings are being borne by the Bank and services of their Attorneys are made available to the Official Liquidator for this purpose. Thirdly, over and above fees permissible under the Rule 291 of the Companies Act for such recovery, the Bank has agreed to pay some more commission on the recoveries. Fourthly, this arrangement is expressly admitted to be for having the benefit of the extended limitation available to the Liquidator. The learned Advocates for respondents therefore, contend that, the recoveries sought to be enforced in the proceedings cannot be said to have been on behalf of the Company when the same are avowedly made on behalf of the State Bank of India in all these material documents and the costs of the proceedings are entirely borne by the Bank.

15. The recitals in these material documents and other facts relied on are not in dispute at all. These recitals in the face of the true legal position and other equally indisputable facts shall have to be ignored as being clear instances of misdescription. The repeated references to the claims being made 'on behalf of the State Bank of India' are really intended to show how the same are being made at its instance and costs and for its benefit. Mere such recitals in the authentic documents cannot, make these claims 'on behalf of the State Bank' when it is clear that the State Bank could neither have initiated such recovery proceedings itself, nor could authorise anybody else as its agent to initiate the same on its behalf. The words merely loosely reflect the understanding reached between the liquidator and the Bank, On the other hand the Official Liquidator alone can claim these debts, from these debtors because, the debts happen to be still owned by the Company notwithstanding their hypothecation. The Official Liquidator is authorised (1) to be the custodian thereof under Section 456 of the Act and (2) to seek recovery thereof under Section 457 of the Act. He cannot be said to need any authority from the State Bank of India to enforce recovery of these debts. He cannot be said to be agent of the Bank in any sense nor can he claim to have any authority whatsoever from the Bank otherwise for this purpose.

16. That their action is facilitated by the assistance given by the Bank has no bearing on the point. The law does not prevent such assistance on the understanding on the basis of which it is furnished. In fact, such assistance may facilitate the process of collection of the assets and winding up process. But for such assistance, collection of the assets may prove to be illusive and beyond the means of the Liquidator, The circumstance that this process extends the limitation and saves the Court fees also is besides the point. It is always open for the litigants to mould their relief if possible, in such a way as to save the Court fees and bar of limitation. To our mind, the recoveries cannot but be held to be on behalf of the Company notwithstanding misdescription thereof in several documents adverted to in the course of arguments before us by the learned Advocates for the respondents.

17. It was then argued that the Liquidator is not competent to act for the benefit of and at the instance of any secured creditor such as the Bank, as the winding up proceedings are primarily intended for the benefit of the unsecured creditors and not for the benefit of secured creditors, who are outside the winding up. Strong reliance was placed on a English judgment in the case of Food Controller v. Cork (1923) A.C. 647, and judgment of the Supreme Court in the case of M.R. Rangnathan v. Government of Madras : [1955]2SCR374 . This contention weighed with the Company Judge who has quoted passages from these judgments.

18. The proposition that, the secured creditors are outside the 'winding up' is now too well settled to admit of any doubt. In fact the law laid down by the Supreme Court is binding on us. It is however, difficult to see how recovery of debts of the Company, under the arrangement with the creditors when the same are hypothecated militate against the rule of law laid down in these cases. The ratio of the case only goes to emphasise that the winding up proceedings cannot impair the security or the right of the secured creditor to satisfy his debts out of the property charged, without being required to prove his claim before the liquidator, and subjected to the rule of 'pan pause' or to share the proceeds of the charged property with any other creditor till his debt is satisfied in full.

19. This, is not intended to relieve the Official Liquidator of his obligation to prevent under selling of the secured property and ensuring the return of the balance after meeting the claim of such creditor, when possible for benefit of the unsecured creditors and the shareholders. This also does not relieve him of his obligation to take possession of the Company's properties including, actionable claim and preventing their becoming time barred and find out ways and means for the recovery thereof if he is not possessed of the required means therefor. This rule does not prevent the Official Liquidator from dealing with such secured properties with the consent of the secured creditors consistent with their security, interest and rights, when it becomes necessary in the discharge of his duties, for the protection of the unsecured creditors. As indicated earlier, Section 529 of the Act itself makes insolvency rules applicable in this behalf, which in turn permits even sale of the immovable property by the Official Liquidator under authority of the Court if this can be done without impairing the security of the secured creditors. It will be sufficient in this behalf to refer to para. 445 of the Law of Insolvency in India, by Mulla and Rules 18-21 under Insolvency Act referred to therein in this behalf.

20. Mr. Chagla drew our attention to the English judgment In Re David Lloyd & Co. (1877) 6 Ch. D. 339 and In Re Herny Pound Son & Hutchins (1889) 42 ch. D. 402. It is sufficient to note that these were the cases where the property was sought to be interferred with by their Liquidator to the detriment of the secured creditors without their consent. It was held that the secured creditor cannot be compelled to give up his security and prevented from enforcing his security otherwise than by reference to the Official Liquidator. Ratio of these judgments can have no relevance to a case before us where the Liquidator is dealing with secured debts not only with the consent of the secured creditors but in accordance with the understanding reached with them.

21. Our attention was also drawn to Palmer's Company Precedents, Seventeenth Edition, (Part II Winding Up) p. 316. Following state of law finds place under the heading 'secured creditor.'

A secured creditor is prima facie entitled to proceed, his security net being part of the estate and effects of the Company, and this being so, it would not be proper for the Court to refuse liberty to proceed, and so compel the secured creditor to allow the assets to be realised in the the winding up, and thus to forgo his just rights.

With respect again, there is no quarrel with the proposition relied on by the learned Advocates for the respondents. The Official Liquidator in the present case is enforcing the hypothecated debts in accordance with the understanding reached with the secured creditors for their benefit.

22. It also cannot be ignored that the property on which security or charge is created, does not cease to be property of the Company in its entirety. In mortgage transaction, part of the property i.e. equity of redemption still stands vested in the Company. In conceivable cases, where the property happens to be of far higher value than the secured debt or in cases, where the debts hypothecated happen to be far more in quantity than the debts for which charge is created, the Official Liquidator, would be required to find out ways and means in the discharge of his duties towards the unsecured creditors of collecting the said assets without in any manner impairing the security of the secured creditors and without causing any damage to their interest. The steps required to be taken for the benefit of the unsecured creditors may turn out to be incidentally even for the benefit of the secured creditors. The contention, therefore, that the Official Liquidator is not competent to initiate Judge's Summons for recovery of the amount for the benefit of the secured creditors, appears to be thoroughly untenable.

23. It will be relevant to note that Rule 291 of the rules framed under the Companies Act, prescribes the quantum of the fees of the Official Liquidator in respect of his work of realising the property (1) for debenture holders or (2) for the secured creditors. The authority for this rule can be traced to Section 451(2). This can be only on the hypothesis that, such realisation is part of the liquidation process and, the duty of the Official Liquidator in proceedings in winding up. This itself militates against any assumption that the Official Liquidator cannot deal with the secured property in any manner.

24. According to the learned Company Judge, such identical acts of the Official Liquidator as Liquidator of the Company under Clause (6) of Rule 291 are distinguishable from his acts in realising the property for the debenture holders and secured creditors under sub-rules (3) and (4). We are unable to see any distinction of substance in these several acts. It cannot be held that the Official Liquidator acts as Liquidator only when he takes steps contemplated under Clause (2) of Rule 291 and acts otherwise than Official Liquidator when he realises the property for the benefit of the debenture holders or secured creditors. To our mind, he has no role to play expecting as such official Liquidator when he deals with the property of the Company in his custody and realises the same, in discharge of duties of collecting the assets of the Company for the benefit of those who are entitled thereto before the Company's ultimate dissolution. The fact that this process benefits secured creditors and debenture holders along with unsecured creditor and the shareholders cannot make the act other-wise then in discharge of his duties, or as such liquidator.

25. It was also strongly urged that such an interpretation of Section 458A will result in permitting two different periods of limitation for recovery of the identical debts from the debtors of the Company depending on whether recovery proceedings are initiated by the Liquidator or some other. This contention is based on the assumption that (1) some other person than the Official Liquidator also can initiate recovery proceedings and that such other person may not be able to claim the benefit of extended limitation under Section 458A of the Companies Act.

26. In our opinion, the contention is based on some misunderstanding. The section does not refer to Official Liquidator, The benefit of extended limitation is available whenever recovery proceedings are initiated 'in the name and on behalf of the Company.' The Liquidator alone is competent to initiate such proceedings under Section 457(1) of the Act. It is difficult to conceive of any other initiating such proceedings and not getting the benefit of this section. It was argued that the Receiver appointed in a suit of the Bank against Liquidator also can initiate such proceedings if authorised by the Court appointing such receiver. But in that case the cause of action itself may be different to make the section inapplicable. It will not be a case of two different periods of limitation for proceedings on the same cause of action. The contention is thus misconceived. ; ^ . j

27. It appears that under the order of the Company Judge dated July 23, 1973, while sanctioning the arrangement with the Bank, the Official Liquidator is directed to maintain a separate account of the receipts from such debtor. This is presumably intended to ensure preservation and continuation of the security of the secured creditors till the amount is paid to the Bank as secured creditor. The learned Advocates argued that maintenance of such separate accounts is not permissible under the provisions of the Act and this involves breach of Section 552 read with Rule 291 which requires depositing of all monies recovered by the Official Liquidator in the public accounts to be opened in the Reserve Bank of India. This circumstance also is relied on in support of the contention that intended recovery is not under the Act and is outside the purview of Section 458A, The learned Company Judge also appears to have been impressed with this contention. We regret our inability to agree with him. We are satisfied that there is absolutely no basis for contention that the amounts of the book debts on receipt, are not actually deposited in the Reserve Bank of India in terms of legislative mandate of Section 552 of the Companies Act. The direction mainly requires the liquidator to maintain a separate account in the books of the Company and not open any separate account in the Reserve Bank of India. Maintaining separate account for such collection in the books of accounts of the Company is one thing and opening a separate account in the Reserve Bank and depositing the amount so received in the Reserve Bank of India is quite a different thing. Our attention was not drawn to any provision which prevents the Liquidator from maintaining separate account in the books in Company's accounts for earmarking the same for benefit of the secured creditors. Mr. Chagla drew our attention to Rule 286 which enumerates the registers, which are required to be maintained by the Official Liquidator, suggesting as if the same do not admit of any such separate account. The said books include general ledger in the particular form. Mr. Chagla could not demonstrate to us how maintenance of such separate account of the receipts is not admissible under the form of general ledger prescribed in this behalf.

28. The impugned order of the Company Judge does not appear to us to be correct. We are unable to see why extended period contemplated under Section 458-A of the Act cannot be applicable to the recoveries initiated by the official Liquidator under his Judge's Summons. It is not disputed that claims in that case would be within time and cannot be rejected as time barred once, extended period is made applicable to the same, The impugned order is thus liable to be quashed.

29. The result is that the 13 appeals Nos. 57 of 1977, 59 of 1977, 61 of 1977, 62 of 1977, 63 of 1977, 64 of 1977, 65 of 1977, 66 of 1977, 67 of 1977, 68 of 1977, 69 of 1977, 70 of 1977 and 71 of 1977 are hereby allowed. The cases are remanded to the Company Judge for considering other points raised by the debtors and disposed in accordance with law. Costs in the cause.

30. Mr. Dalai, the learned Advocate appearing for the respondents in Appeal No. 66 of 1977 applies for leave to appeal to the Supreme Court. Leave refused.

31. Mr. Mahesh Master, the learned Advocate appearing for the respondents in Appeal No, 70 of 1977 also applies for leave to appeal to the Supreme Court of India. Leave refused.

32. Mr. Variava, the learned Advocate appearing for respondent in Appeal No. 71 of 1977 also applies for leave to appeal to the Supreme Court of India. Leave refused.


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